Germany is facing into a winter recession, according to leading economists, as uncertain energy deliveries and spiralling prices put the squeeze on Europe’s largest economy.
Munich’s Ifo institute slashed four points off its 2023 growth forecast on Monday, predicting shrinkage of 0.3 per cent next year. In parallel it predicts German inflation, currently at 7.9 per cent, will hit 8.1 per cent this year and 9.3 per cent next year.
“We are heading into a winter recession,” said Prof Timo Wollmershäuser, head of forecasting at Ifo. “The cuts in gas supplies from Russia over the summer and the drastic price increases they triggered are wreaking havoc on the economic recovery following the coronavirus.”
While real household purchasing power and incomes will drop sharply in the months ahead, a “return to normal” is likely in 2024, he suggested, with 1.8 per cent growth and 2.5 per cent inflation.
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Compounding an already tense situation, the Ifo cited the effective end of Russian gas deliveries to Germany earlier this month as state-controlled energy giant Gazprom halted gas deliveries via its Nord Stream 1 pipeline for an unspecified period of repair.
German economists have responded positively to stimulus and relief packages worth €100 billion in total devised by the federal government. The latest package, unveiled last week, cuts VAT on gas, boosts dole and child benefit and offers one-off payments to pensioners and students.
The Ifo said these measures would “mitigate” the blow but would not offset entirely the loss of purchasing power. This slide in real per capita wages will hit around 3 per cent this year and again in 2023, according to the Ifo, “higher than at any time since the current system of national records was introduced in 1970″.
Other economic indicators tell their own tale of a growing storm, with a rise expected in the number of bankruptcies in the months ahead.
The Leibniz Institute for Economic Research in Halle (LIW) pointed to a simultaneous rise in production and energy costs and a minimum wage hike in October, combined with a rise in financing costs after last week’s interest rate hike from the European Central Bank (ECB).
LIW researchers say German manufacturing companies will bear the brunt of the looming economic storm, in particular because of a five-fold increase in gas prices. “They will lose international competitiveness as a result,” says Dr Oliver Holtemöller, head of the macroeconomics department. “Private households will be forced to reduce their other consumer spending, which will result in a decline in overall economic production.”
